The budget has shifted the focus from the debt problems of the banking sector to those of the state. But our banks are far from out of the woods, as the Bank of England's latest financial stability report makes clear.

The good news is that the UK banks are somewhat healthier. They are better capitalised, they have reduced their leverage, they have more liquidity and they are more attentive to risk management. But they still face significant perils, including sovereign debt crises, a ratings downgrade if the support extended by the UK government is perceived to be in doubt and a rise in bad debts in the household and corporate sector if austerity takes its toll on the economy.

And they still need to raise £800bn or so of capital to refinance their borrowings by the end of 2012. That is a tall order, and the danger is that they try to bolster their reserves by putting a further choke on lending, despite government exhortations.

Reforming the financial sector is high on the G20 summit agenda. President Obama's plans for the most sweeping overhaul of Wall Street since the Great Depression - when the Glass-Steagall Act banned banks from mingling speculative activities with their day-to-day savings and loans operations - have been scaled back so they can continue to trade most derivatives and to own private equity arms and hedge funds. That is an ominous concession.

The banks have also been given leeway on the so-called Basel III plans requiring them to retain bigger cushions of capital, in order to allow them to make the transition over time. The Bank of England is exhorting them to begin building their buffers now. It wants a climate where they dish out less capital to shareholders and high-earning employees and keep more in their vaults. A healthy, well-capitalised banking industry which focuses on its social function of serving productive industry and which rewards its top staff appropriately, is essential to the recovery. But given that bonuses have continued at gravity-defying levels throughout the crisis, one can only wish governor Mervyn King the best of luck.